After writing a post yesterday on the homebuyer tax credit — asking readers just how well they know the tax credit — the question popped into my head: “I wonder how successful the tax credit has been this year in comparison to last year?” I got an answer from one source.

From National Mortgage News (emphasis added):

The homebuyer tax credit has been a dud so far this year, but the National Association of Realtors is hoping it will kick in this spring and drive home sales higher before it expires at midyear. When the tax credit was due to expire in November, the rush by new first-time homebuyers to meet the deadline pushed November sales 45% higher than a year ago. “We would anticipate that April, May, June home sales figures will be high if there is a similar buying pattern as last year,” said Lawrence Yun, chief economist for NAR. But so far the extension of tax credit by Congress has generated only a modest increase in foot traffic, he told reporters. And the expansion of the tax credit to existing homeowners or repeat buyers has not generated much excitement either. “Right now there is nothing to indicate we will get that 40% kick” in May or June, Mr. Yun said. “But we are keeping our fingers crossed.”

What’s behind the lack of “foot traffic?”

Especially with an expanded tax credit in place, why aren’t more borrowers taking advantage of what is being offered? Beyond the minimal activity associated with the winter home-buying season — a slow season made even slower by major snow storms — there’s a consequence to altering the marketplace with cash incentives: it changes borrower behavior.

“Natural demand that would have occurred in December, January and February got bumped up — a certain amount of demand was advanced in November due to the pending expiration,” explains HSH VP Keith Gumbinger.

“That said, you can bet that potential buyers are scrambling once again with the credit set to expire in only six weeks.” (We’ve noted in several posts that “The mortgage process usually takes anywhere between 45 and 60 days.”)

Will a quiet 2010 kill the credit’s chances of another extension?

Not necessarily. If the tax credit isn’t flying off the shelves, than it’s not costing taxpayers much either. However, whether the credit receives another extension or not depends on the amount of political pressure, said Gumbinger.

Don’t expect a decision to come right away. “You’ve to give people time to react,” he said. If the people react, and if the trade groups — such as the realtors and home builders — apply the pressure that the market can’t properly function without the credit, then lawmakers may be forced to extend the program one more time.

In late January, we wrote a post on the homebuyer tax credit because many consumers were complaining about just how long it was taking to receive their check. The reason for the delay? Due to rampant fraud surrounding the program, the IRS decided to change the documentation it required in order for homebuyers to receive their “credit.”

A short paragraph in the latest Kiplinger Tax Letter points to the fact that the IRS still doesn’t have the fraud problem under control. Furthermore, this item also provides some very definitive answers to the questions: “Is the homebuyer tax credit a loan? Is it a credit? Is it a one-time check for a couple grand? Does it ever have to be repaid?”

According to the tax letter: “The IRS has a new way to police the recapture of the home buyer credit: It will check public databases of real estate sales. If a person buys a home between Jan. 1, 2009 and April 30, 2010 and sells within three years, the tax credit is [repaid to the IRS]. The $7,500 credit for purchases between April 9 and Dec. 31, 2008 is recouped over 15 years, but the remaining balance is due if the home is sold early.”

By this reckoning, if you bought a home in 2008, you got more of a loan than a credit. Ironically, the IRS agrees (emphasis added):

For 2008, the credit applies to a principal residence purchased by the taxpayer after April 8, 2008, and on or before December 31, 2008. Homebuyers who qualify are allowed a one-time credit against their income tax for the year of purchase. Unlike some past credits, this one must be repaid over a 15-year period. As a result, the new tax credit works like an interest free loan. You take the full credit on your 2008 return, and then repay the credit amount in equal payments over 15 years, with no interest charges.

If you bought a home between January 1, 2009 and April 30, 2010, you don’t have to repay it, provided that you hold your home longer than three years, otherwise your credit must be repaid in full:

The obligation to repay the credit arises only if the home ceases to be your principal residence within 36 months from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being your principal residence.

Here are two scenarios of what will happen if you sell your home (purchased in 2009 – 2010) within three years of receiving the tax credit:

Example 1: Taxpayer, a first-time homebuyer, purchases a home for $100,000 in 2009 and claims an $8,000 first-time homebuyer credit. In 2011, the taxpayer sells his home for $120,000. He has no adjustment to basis. The taxpayer must pay an additional tax of $8,000 for 2011.

Example 2: Assume taxpayer in example 1 sold his home to an unrelated person for $98,000 in 2011. He has no adjustments to basis. To determine the amount of gain for recapture purposes, the taxpayer’s $100,000 basis is reduced to $92,000 by the $8,000 credit. His gain for this purpose is $6,000 ($98,000 amount realized minus $92,000 basis). Taxpayer must pay an additional tax of $6,000 for 2011.

While we aren’t tax experts, if you have any questions regarding the tax credit, you can submit them in the comment section of this post, or click the “contact us” link in the top-right portion of the page, and we’ll do our very best to answer them.

[Last] week, the overall average for 30-year fixed-rate mortgages tracked by HSH.com’s FRMI sported a decline of six basis points (.06%), ending HSH.com’s survey week at 5.34%, the lowest such average since mid-December 2009. The FRMI includes conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation. The average interest rate for the FRMI’s Hybrid 5/1 ARM counterpart lost a full tenth-percentage point (.10%) during the latest survey cycle, closing the survey week at 4.48%.

The all-important 30-year fixed conforming average slipped to 5.07%, also a ten-week low point.

Mortgage rates eased back [last] week despite a pretty good tone for the economic data. Friday’s employment report did nudge the 10-year Treasury about seven basis points higher, suggesting that the decline in rates could reverse somewhat during [this] week. Rates might also be boosted by comments made by House Financial Services Chairman Barney Frank, who noted that holders of Fannie and Freddie debt should not consider their investments to be 100% backed by the US government, even though the companies are now under Federal control. He went on to say that when the companies are ultimately restructured, he wants to reserve the right to have debt holders take a “haircut” (a reduction in the value of their investments). If private-market investors choose to sell their holdings of Fannie and Freddie debt or not buy newly-issued debt, the GSE’s cost of funds would rise, and so would mortgage rates. Of course, the Treasury continues to provide unlimited support to these entities; perhaps Mr. Frank hoped to spook investors in order to make Fannie and Freddie even less private and more beholden to the government than they already are? It’s hard to know if that was the intention, but it could certainly be the effect.

Residential mortgage rates will probably firm up a little bit [this] week. How much depends upon how investors ultimately perceive Mr. Frank’s remarks, but we expect a couple of basis points increase even without those effects.

Click here to continue reading “Ten Week Low for Mortgage Rates; Economic ‘Spring Awakening.’” HSH’s free Market Trends Newsletter, an in-depth analysis of various financial markets from the week prior, is published every Monday. Email subscribers receive it in their inbox Friday night, so sign up today! Also, be sure to check in with our Market Trends blog for all news relating to any weekly shift in mortgage rates.

Let’s take a look at the fresh content on our home page:

Refinancing:

Refinancing Your Jumbo Mortgage May Be Easier Today

How Refinancing Affects Your Total Mortgage Costs

Home Equity:

Student Loans vs Home Equity Loans

The Best Way to Take Reverse Mortgage Proceeds

Homeowners & Repeat Buyers:

How to Buy and Finance Investment Property

Energy Efficient Mortgage Programs

Government Programs:

Find Out if HUD Owes You a Refund

HAMP versus HARP: Which Is Right for You?

Loan Modifications & Help:

FTC Plans to Eliminate Upfront Charges by Loan Mod Companies

Are Mortgage Principal Reductions Possible?

The “good” news is that the unemployment rate held steady — remaining at 9.7% — but last month marked the 25th time payrolls have dropped in 26 months, according to MarketWatch.com.

Despite years of payroll declines, we’ve been saying for months now that the number of losses are trending in the right direction. “The improvement is real,” said HSH VP Keith Gumbinger. “The bleeding has stopped.”

While the stability comes as a welcome sign, it doesn’t necessary translate into recovery. “The improving overall picture still hasn’t produced any positive effects — help wanted ads still aren’t filling the classifieds,” said Gumbinger.

The fact that over a year ago the monthly payroll numbers bottomed at a monthly loss of 741,000 makes February’s report — while still negative — feel like a positive. That being said, until the monthly numbers actually turn positive, we’re not out of the woods. “With a little luck, we should finally move upward for good in the next few month,” said Gumbinger.

Has anyone seen their unemployment situation improve over that last few months?

Yesterday, Treasury Secretary Timothy Geithner announced that the GSEs will stay as is for 2010, and will not be reformed or restructured until some time next year:

“We do not think it is necessary to consolidate the full obligations of Fannie and Freddie onto the nation’s budget but we do think it’s very important … that we make it clear to investors around the world that we will make sure that we will take the actions necessary” to keep the two companies stable, Geithner told the House of Representatives Budget Committee.

Geithner told the panel that the Treasury would lay out some “broad principles” for restructuring the two government-sponsored enterprises this year, but a full legislative proposal on their future would not be submitted until next year.

Regardless of the reasons Geithner or other Federal officials provide as to why the Fannie/Freddie reform has been delayed, we’re of the strong opinion that Washington isn’t ready to lose control of the entities that have been the main force behind their housing rescue efforts (HAMP, HARP, buying of bad loans, keeping mortgage rates low).

What’s particularly more troubling is that Washington seems content with the current structure of two companies that continue to hemorrhage taxpayer money:

Loans [guaranteed by Freddie Mac] over 90 days delinquent increased to 4.03 percent of all loans during January compared to 3.87 percent in December.  The delinquency rate in January 2009 was 1.98 percent.

From HousingWire.com:

The serious delinquency rate at government-sponsored enterprise (GSE) Fannie Mae rose nine basis points in January to 5.38% in the single-family mortgage book. Its a slight increase from 5.29% last month.

Furthermore, on Christmas Eve 2009, the U.S. pledged its unwavering financial support to Fannie Mae and Freddie Mac, offering them unlimited funding.

For at least the next year, Fannie Mae and Freddie Mac will likely remain at the forefront of the loan modification and refinance efforts, and at least for the next several months, will begin to buy hundreds of thousands of bad mortgage loans off the books of investors.

It will be interesting to see how or if the GSE’s roles change over the next year, and if Washington is willing to surrender them. “I could see Fannie and Freddie becoming the new TARP — an ever-changing policy tool for Washington to use at their disposal,” said HSH VP Keith Gumbinger.

According to the National Association of Realtors, “Since HARP began last April, it has refinanced 190,180 mortgages.” That’s a far cry from helping the 4-5 million homeowners that the program originally promised.

HARP was designed to cater to underwater homeowners who couldn’t qualify for private-market refinances due to their minimal or negative equity position.

With such little success, why extend the program any longer?

“[Federal Housing Finance Agency] FHFA has reviewed the current market situation and the state of mortgage insurance availability and has determined that the market conditions that necessitated the actions taken last year have not materially changed,” said DeMarco. “Accordingly, to support and promote market stability, and to encourage lenders and other mortgage market participants to fully adopt the HARP program, including the implementation of the October 2009 expansion of loan-to-value ratios (LTVs) to 125 percent, FHFA is authorizing the extension of HARP until June 30, 2011.”

Beyond unchanged market conditions, beyond the fact that swaths of underwater borrowers still exist, there are several fundamental reasons why borrowers aren’t refinancing and can’t refinance at the pace Washington had hoped.

Our friend Nick Timiraos at the Wall Street Journal explains that there are simple and fundamental roadblocks that are preventing more refinances (emphasis added):

Falling home prices have left many owners with little or no equity, making it harder to qualify for refinancing. Moreover, stricter lending standards and higher fees by banks and mortgage giants Fannie Mae and Freddie Mac and declining incomes have made it tougher and less attractive for borrowers to seek new loans.

In addition to these, small loan balances and job losses (a two-income home become a one-income home) are also reasons people don’t refinance.  Separately, on the surface it’s perplexing why more borrowers haven’t refinanced to historically-low mortgage rates, given the potential for substantial savings. History proves that rock-bottom rates are the main force behind past refi booms:

One indicator of the economic impact of refinancing: Loans that refinanced in 2009 will result in $3.4 billion in savings for consumers this year, according to a report by First American CoreLogic, a research firm based in Santa Ana, Calif. That will return an additional $17.2 billion in savings to borrowers over the next five years.

The last time mortgage rates were at current levels, in 2003, refinancing activity hit $2.9 trillion, according to trade publication Inside Mortgage Finance. Last year, refinance volume reached $1.2 trillion, the highest amount since 2003 but not nearly as much as expected, considering how low interest rates have fallen.

The reason behind the lack of refinancing seems to be the “perfect storm” of borrowers being denied refinances, and borrowers flat-out deciding against refinancing. Given the fact that this “perfect storm” is counteracting HARP’s success, was it worth keeping it around for another year?

If low rates are no longer the catalyst behind refis, and outside forces such as strict lending conditions and higher fees are preventing new refis, does HARP even have a purpose?

The original portion of this post was published on 03/02/10.

By visiting www.investor.gov, investors can access information in a user-friendly format that is specifically tailored to their needs. The site includes sections specifically for those just getting started investing, for those saving for a child’s education, and for those planning for retirement. It also has a detailed “Seniors Care Package” section for senior citizens and caretakers.

The impact and influence that the Bernie Madoff scandal had on the investing world is quite evident on this website. Investor.gov has an entire page dedicated to Ponzi schemes – complete with a list of frequently-asked questions — as well as a page on fraud prevention. As the SEC notes in their mission statement:

The world of investing is fascinating and complex, and it can be very fruitful. But unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. That’s why investing is not a spectator sport. By far the best way for investors to protect the money they put into the securities markets is to do research and ask questions.

The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.

Perhaps most importantly, the SEC provides a link that allow investors to check out the background of their investment professional. The site also provides additional tools like an investment calculator, and avenues to contact the SEC with either a question or complaint.

Check out Investor.gov and let us know what you think.

This new and alarming trend of borrowers prioritizing their credit card payments before their mortgage payments is even occurring amongst borrowers with high credit scores, according to FICO:

“We’re identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before,” said Dr. Mark Greene, CEO of FICO, in a statement. “Economic instability is creating unknown risk in lenders’ credit portfolios as well as counter-intuitive trends in consumer behavior.”

The shift to a consumer preference to stay current on unsecured debt, as opposed to secured debt, began last year. In 2009, 0.3 percent of consumers with FICO scores between 760-789 defaulted on real estate loans, compared to 0.1 percent who defaulted on credit cards. In 2005, credit card delinquency risk was three times greater than today. In 2008, the lower to credit cards being just 1.6 times more likely to become 90 days delinquent than were mortgage loans.

These findings directly coincide with a recent study by TransUnion (see below).

What’s behind the trend? “The stigma surrounding foreclosures has lightened appreciably,” said HSH VP Keith Gumbinger. “There are fewer penalties and far more opportunities to avoid foreclosure now than there have ever been.”

Original post (published on 02/03/10):

“You cannot buy groceries with your house.”
-Sean Reardon (TransUnion)

Assuming you have debt in both a credit card and a mortgage, which debt would you pay down first? In this post-recession society, more and more cash-strapped consumers are having to prioritize their debt payments. For most, it comes down to “what can I do without this month?”

According to a recent study by TransUnion, more Americans are choosing to pay off their credit cards before they make their mortgage payments — a trend that has really only recently begun.

What’s behind the trend? “The stigma surrounding foreclosures has lightened appreciably,” said HSH VP Keith Gumbinger. “There are fewer penalties and far more opportunities to avoid foreclosure now than there have ever been.”

Chalk this growing trend up as another unintended consequence of the federal home preservation efforts. Opportunities abound for borrowers who can’t (or don’t) make their mortgage payments on time: there are loan mods, refis, foreclosure moratoriums, forbearance programs, and the list goes on. We’ve heard numerous stories of borrowers who have been able to live “rent free” in their foreclosed property for months before being evicted.

Strategic defaults are a perfect example of how the moral dilemma of paying your mortgage debt has begun to fade.

We want to hear from readers — have your ‘paying down debt’ priorities changed over the last year? Which goes first?

While the inventory-led “technical” economic recovery pushed the latest revision of the nation’s Gross Domestic Product to a robust 5.9% increase in the fourth quarter of 2009, more than a few signs [last] week pointed to a much more muted pace of growth.

Although it would be hard to find any group who might cheer on stumbling economic growth, would-be homebuyers and refinancers do benefit to some degree as a weak trajectory means continued low — and possibly falling — interest rates in the days ahead.

[Last] week, the overall average for 30-year fixed-rate mortgages tracked by HSH.com’s FRMI shed a lone basis point (.01%), ending HSH.com’s survey week at 5.40%. The FRMI includes conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation. The FRMI’s Hybrid 5/1 ARM counterpart remained unchanged during the latest survey cycle, closing the survey week at 4.58%.

It’s hard to believe that March is fast upon us. The new month will bring a cascade of first-week-of-the-month data [this] week, including the latest ISM surveys, Construction Spending, the Beige Book, Productivity, Consumer Credit and the all-important Employment Report for February. Given current trends, it seems likely that manufacturing-related stuff should be stronger, consumer and labor weaker (steady at best) and that mortgage rates will follow the decline in yields this week. Figure a handful of basis point decline for the average 30-year fixed-rate by week’s end.

Click here to continue reading “Bad Economy Good News for Mortgage Rates.” HSH’s free Market Trends Newsletter, an in-depth analysis of various financial markets from the week prior, is published every Monday. Email subscribers receive it in their inbox Friday night, so sign up today! Also, be sure to check in with our Market Trends blog for all news relating to any weekly shift in mortgage rates.